First time buyer hesitations

[Alex Bollero]

Good afternoon. I have been searching for a home around the east side of Indianapolis for about a month now with the intent to find something that is live-able but could use some fixing to add value (I have a background in construction, and between myself and my friends, could perform most of the work myself). My intent was to buy a property, live in it for two years and either sell it or rent it out afterwards. I have great credit, but with interest rates the way they are my monthly payment was going to be $1500+ a month. Below is a breakdown from the bank at the time I was about ready to put an offer in on a property but ultimately got cold feet, covering 3 different types of loans. The house was listed at $209,900.

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0 Down – Moderate/low income tract – which is where there is house is located

• Purchase Price $209.9K
• Interest Rate: 5.75%; 30 yr fixed
• P&I Payment $1225
• Add $300 for property taxes and insurance….I said payment of $1515 on the phone, but rounding up $1525 should be safe, not know the cost of insurance
• No PMI and we waive our $795 Lender Fee.

5% Down Conventional

• Purchase Price $209.9K and loan amount of $199,405

• Interest Rate: 5.50%; 30 yr fixed
• P&I Payment $1132 + $73 PMI + $300 taxes and insurance ='s $1505 total payment
• You would have the $795 Lender Fee too.

FHA 3.50% down

• Purchase Price $209,900 and loan amount of $206,100. This loan amount includes a mandatory 1.75% fee from FHA be added to the loan amount…it is financed in, but you are still paying it via the loan as it increases the monthly payments
• Interest Rate 5.25% =’s $1138 + $146 pmi + $300 =’s $1584
• Lender Fee of $795
• “Best rate” but worst option for a loan for you.
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I was in the market to utilize the top loan, which is a "neighborhood loan" where you don't have to have a down payment and there is no PMI - as long as the house is in a low/moderate income area. Seemed like a home run to me as my buddy utilized this loan and had no issues. The east side of Indianapolis is up and coming aka the poverty is being pushed further and further away from downtown. The whole reason I wanted to buy a house was to start the process of creating some passive income, as well as get out from under a $1455/month rent payment at my apartment... after I started my search, I realized that my monthly expense would increase after seeing what interest rates did to the monthly payments. After a lot of contemplating over the last few weeks I am questioning if buying a house right now is a good idea - granted we are pending a recession at anytime. Please correct me if I'm wrong but here are my thoughts on purchasing a house before a recession:

-House prices take a big hit if we enter a recession. True or False?

-If a buy a house at an already inflated price, and the value drops during a recession, I'll be on the hook for more than my house will appraise for. If the market takes longer than two years to bounce back, I would then need to increase profit margins on the renovation, or hold for longer. True or False?

-I have money in savings for a down payment, is there any value in going conventional over the no down payment program? The way I looked at it is that it didn't lower my monthly payment that much and the money could go towards renovation instead of a hefty down payment, which would lower my risk. Thoughts?

Thanks in advance!

[Jack C. Cheng]

Hi @Alex Bollero. This is a common dilemma for a lot of buyers right now. I'm a Broker in Wisconsin, but also own investment properties in Indy. My best advice to not try and time the market as it's impossible. There were a lot of buyers who dropped out a couple of years ago because they thought prices were too high. Now they all regret not buying when they could.

Like with any investment, real estate will have its ups and downs. However, the values will continue going up over over time. This is why real estate is such a great hedge against inflation. If your intention is to live in the property for a few years and then rent it out, you'll do just fine. Rents will keep increasing, so your cash-flow will only increase year over year since your expenses are pretty much fixed. Good luck and let me know if you have any other questions!

[Mitch Kennedy]

Hey Alex,

Some answers to your questions:

1. Yes, if we enter a recession, housing prices will likely drop. However, if you listen to a lot of the content that BP and other real estate sources put out (not the general media), the ingredients for a housing crash just aren't all there. A lot of this is fueled by the fact that demand is so high, which is likely going to continue for the coming years. 

2. Worse case scenario: there's a housing crash after you close and the value of the home drops significantly. You're only "on the hook" if you sell, and the best part is, you don't need to sell because you need a place to live and you'll be living in one side and renting out the other. Even if after two years the price hasn't fully recovered, you can still live there... for Free. You mention that the total PITI would be ~$1,500. I'm not sure what area of East Indianapolis you're in, but looking at the zipcode 46201, the average rent for a 1 bed 1 bath is $1,600. So even if you need to live there for another year, after 3 years that's $52,380 you've saved by not paying your apartment rent, and $3,600 extra you've brought in by renting out the other side (assuming it's a 1 bed 1 bath renting for $1,600 and your mortgage is $1,500 and rent never goes up over those 3 years).

3. If you're able to get the property for 0% down and rent from the other side covers your mortgage, 100% go for that. That's less $$ in the deal, a better ROI and ROE. You can hold $$ for reserves, use what you have to make improvements, or save for another property as well.

[Tyler Lingle]

Buying in Indy over the next 5-10 years is almost never a bad decision. We are the most steadily growing Metro Area in the Midwest at 2-3% a year with a diversified economy and relatively strong GDP for how affordable we are. In fact, we are a hugely undervalued city as the 2nd most affordable large metro area (after Memphis). To buy now in Indy, especially considering we literally bottomed out in housing inventory in March (lowest point in more than a decade) is a very smart move. Everything is spelling more appreciation. It's supply demand. Interest rates will hurt demand but supply and the strength of our local economy is such it won't matter. My two cents. 

[Jake Knight]

Quote from @Tyler Lingle:

Buying in Indy over the next 5-10 years is almost never a bad decision. We are the most steadily growing Metro Area in the Midwest at 2-3% a year with a diversified economy and relatively strong GDP for how affordable we are. In fact, we are a hugely undervalued city as the 2nd most affordable large metro area (after Memphis). To buy now in Indy, especially considering we literally bottomed out in housing inventory in March (lowest point in more than a decade) is a very smart move. Everything is spelling more appreciation. It's supply demand. Interest rates will hurt demand but supply and the strength of our local economy is such it won't matter. My two cents. 

Facts, as I understand from a local perspective. Infrastructure here is improving as well and there is a lot being built because demand.  Values should easily continue to increase or at very least be stabilizing. The near Eastside is also an Indy Opportunity Zone"

[Dave Skow]

@Alex Bollero- thanks - buyers remorse or buyers cold feet is common now .....keep in mind the present rates are still on the low side ...there is plently of room to see these rates go higher .....2) timing to try to buy at the right time will be impossible and frustrating ...if you can pull the deal off and have the payment be afforable - I would encourage you to do it 3) the 1st option with 0 down and no PMI seems like the no brainer to use ...3) if you are freaked out by not having any equity in the property right away - put a little bit down and use the 95% conv option 4) dont use the FHA option

[Marcus Auerbach]

I believe the FED will have throttle the economy down in order to get a grip on inflation, that will take a while and will lead to nedative growth, aka a recession.

When you do a little homework you will find that real estate values went up during 4 out of 5 recessions; 2008 is the only exception and that was a mortageg crisis/housing bubble that caused a recession, not a recession that caused a housing crash.

So will a recession cause a housing price crash? No.

Supply and demand drive house prices and everything else is just noise. Even h igher interest rates only have the power to cool the market, not to crash prices, which are two very diferent things.

Finally google US home prices since WWII and look at how many "crashes" you can find in the history of the housing market. What you will find is that we have seen many down cycles, which meant that home prices went sideway for a while.

This market will eventually cool off, but it may take years for this to happen. Hosue prices are not even up that much if you substract inflation.

When you buy your first home, at least you lock in your monthly payment. It does not matter what prices or inflation do, your payment is fixed. Even if values were to go down, it would only be temporary, by the time you sell the house (10 years is US average) prices will be long recovered.

 Rents will go up.

Less than 20% down will cost you PMI, that's the only difference.